Investing wisely is one of the most important factors in building and maintaining wealth. But what if you don't have a lot of operational cash with which to invest? Should you borrow money in order to invest it in other things? While this isn't always a smart move, it can be the right call under certain circumstances. Here are five situations when you should consider this move.
1. When You Have Professional Help
Using debt to invest — called leveraging — is risky, so start by getting professional, unbiased advice on the subject. A good wealth management planner can help you figure out what amount is safe, find the best sources of credit, and choose wise investments. They'll also help you stick to your plan and not let the leverage get out of hand.
2. When You Limit the Leverage
Leveraging should be a small portion of your overall investment strategy. When you borrow to finance an investment, you must factor in the cost of repayment and the need to continue repayment no matter how the investment does. If it loses value, an investment that represents only 10% of your portfolio is much less costly than one that represents 100% of your portfolio.
3. When You Get a Good Rate
Anyone considering using leverage should only do so when the interest rate and costs of credit are low enough to offer a wide profit margin. Risking the addition of a monthly repayment in order to gain 1% or 2% may not be worth it. But taking on some risk for a 10% return on a 2% loan could be a good gain.
4. When You Understand the Investment
If you don't know anything about an investment, you can't properly evaluate its risk or rewards. The danger of doing so is doubled when you borrow money to invest. So if you don't know how cryptocurrency or NFTs work, you might do better to use leverage for traditional investments and speculate with cash-in-hand instead.
5. When There's a Compelling Reason
Finally, don't borrow to invest just because you can qualify for credit. Because you take on more danger doing this, reserve it for the right time. That trigger could be stocks with particular growth potential, an investment with a deadline, the need to catch up on retirement, or using your cash for some other income pursuit. Discuss the potential and the reasoning with a professional first.
Do you find yourself in any of these categories? If so, start by learning more about the best way to use leverage as an investor. Make an appointment with a financial planner who works in wealth management today. With their guidance, you'll be the best — and savviest — investor you can be.
